FLAGSHIP U.S. INVESTMENT "FIJI WATER" UNDER THREAT

C O N F I D E N T I A L SECTION 01 OF 02 SUVA 000009

SIPDIS

SIPDIS

BANGKOK FOR ICE
CUSTOMS FOR CBP/OIT

E.O. 12958: DECL: 01/08/2018
TAGS: ETRD EINV FJ
SUBJECT: FLAGSHIP U.S. INVESTMENT "FIJI WATER" UNDER THREAT

REF: A. 2007 SUVA 580


B. 2007 SUVA 418

Classified By: Amb. Dinger. Reasons 4.2 (b) and (d)

Summary
--------------

1. (C) A dispute over transfer pricing has led the Fiji
Islands Revenue and Customs Authority (FIRCA) to suspend
exports of Fiji Water. Interim Finance Minister Chaudhry and
FIRCA are demanding that U.S.-owned Natural Waters of Viti
Limited (NWVL) increase its invoiced cost per case of water
destined to its U.S. parent company by 350 percent before
customs will again permit exports. The ultimatum has already
resulted in two regular shipments to the United States being
stopped. Just hours after NWVL officials were told of the
demand by FIRCA, a letter from Chaudhry arrived advising
that, due to supposed failure to provide requested
information about transfer pricing, the company's ten-year
tax exemption will be terminated in 21 days, approximately
one year before its expiration date. NWVL Director David
Roth told the Ambassador January 8 that some 250 shipping
containers of Fiji Water, valued at about $1.5 million on the
U.S. market, are stuck on the dock. Roth said the proposed
invoice-valuation increase, coupled with the loss of the tax
exemption, would theoretically boost Fiji tax revenues
tremendously but would make the company unviable. Company
attorneys are preparing lawsuits, ready to be launched as
early at Monday, January 14, if further talks with the
interim government do not bear fruit. Roth asked the
Ambassador to contact the interim Prime Minister's office to
flag that the issue is serious, and he requested a USG media
statement, for use as early as Jan. 14, if necessary. End
Summary.

Shocking news
--------------

2. (C) Roth rushed back from a holiday in the U.S. when FIRCA
on Jan. 4 advised NWVL that, beginning immediately, NWVL
invoices submitted to Customs for clearance of Fiji Water
shipments out of Fiji must show a cost of US$ 24 per case.
The figure would constitute a 347 percent increase from the
current listed price of US$ 6.91. Presumably, it would
become the base for Fiji's 31 percent tax that will apply to
the company's shipments once its tax exemption is gone. The
increase effectively raises the invoiced cost of each 500
milliliter bottle of Fiji Water shipped to the United States
market from 28.8 cents to one dollar (Note: the prices
reported here are commercial confidential information.) Roth
said that, based on current margins, if the increase were
passed along proportionally through the existing complex
distribution and marketing chain, end consumers in the United
States would have to pay US$ 30 for a bottle of Fiji Water.
Roth said the increase threatens the very existence of Fiji
Water as a viable company.


3. (C) Roth said the FIRCA pricing ultimatum, which has only
been made verbally thus far, has already blocked two
shipments of water to the United States, on Friday the 4th
and again on Monday the 7th. While sufficient inventory is
on hand in the U.S. to manage demand for "a couple of
months," the failure to make the two shipments has resulted
in significant monetary liabilities as a result of
contractual shipping obligations. If shipments are not
resumed within two to three weeks, Roth said, "the company
could be on the block." He and one of NWVL's senior legal
counselors intend to call on members of the interim
government and on the military council to inform them of the
situation and explain the consequences.

Requests for USG help
--------------

4. (C) Roth said Fiji Water and its parent company, Roll
International in LA, are preparing a number of legal
challenges to the Finance Ministry and FIRCA actions. The
company has also dispatched a public relations team to Fiji
to manage the anticipated battle for public hearts and minds,
aimed at alerting Fiji's people to the huge negative
international fallout likely if Finance doesn't change
course. If talks with government figures, up to and
including Prime Minister Bainimarama are not successful, the
situation could reach the crisis stage as early as Monday the
14th. Roth asked if the Ambassador could speak with the
permanent secretary in the prime minister's office, Parmesh

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Chand, to make sure the PM is aware of FIRCA's demand and the
Finance Minister's decision to revoke the tax exemption.
(Chand has not yet returned our calls.) Roth also asked the
Ambassador for an embassy statement in support of Fiji Water.
The Ambassador proposed to consult with Washington on a
statement to emphasize the importance of rule of law and a
level playing field in international commerce, noting the
potential damage to Fiji's international reputation as an
investment destination.

Possible explanations for irrationality
--------------

5. (C) Roth has briefed the embassy previously about a
growing tension between elements of the interim government
and Fiji Water. Repeated efforts to explain the intricacies
of the U.S. beverage market to government officials,
including details of NWVL's pricing policies, had not
convinced some in the government. Certain suspicious Finance
Ministry and FIRCA officials inevitably have reverted to the
argument that something is wrong with the transfer pricing
calculation if bottles leaving Fiji are priced at 29 cents
and end up costing nine dollars in hotel mini-bars. Roth
said that in a meeting on the 8th with the CEO of FIRCA,
Jagat Narayan, and with FIRCA staffers, Narayan came to
accept the logic of NWVL's transfer pricing; but Narayan said
the increase and shipping ban "were not my choice." He
indicated his hands were tied on orders from higher up,
presumably by Minister Chaudhry.


6. (C) Roth speculates that several factor's beyond lack of
knowledge about transfer pricing may be at work. A former
NWVL employee, a Polish citizen who was fired several years
ago, has become a FIRCA consultant. A British/New Zealand
citizen who is now on FIRCA's staff at one time was the
Pole's lawyer. NWVL suspects both continue to have axes to
grind. Also, Roth is concerned that local competitors
reportedly have gained Chaudhry's ear. As reported Ref B,
Chaudhry has previously warned that "any obstacle put in the
way of achieving Island Chill's (a locally owned, Fiji Water
competitor's) goal will be dealt with decisively." Another
possibility is that the interim government, desperate for
revenue, really thinks NWVL can be its "golden goose." Roth
said it is not clear whether the pricing demand and threat to
the tax exempt status are a bluff, a "bad opening to a
negotiation," or an attack on the American company, aimed
possibly at driving it out of Fiji in favor of a local owner.
In his view, the interim government's moves do not bear the
markings of what would be part of a rational negotiation
process.

Potential disaster for all
--------------
7 (C) Since the December 2006 coup and the resultant
economic downturn, particularly in the tourism sector, Fiji
authorities have been worried about the country's foreign
exchange position. Bottled water is the only big export
earner that is clearly still on the rise. The current push
against Fiji Water threatens to turn even that success story
into a disaster.
DINGER